Oregon Outlook

Construction Outlook Cautious for Upcoming Year

By Amy Rose Davis

An air of caution hovers over Oregon’s construction industry as owners, lenders, and construction professionals look forward to the end of 2008 and first months of 2009, but no one is predicting a major slowdown or recession in the industry.

Oregon’s construction economy shows signs of staying soft overall during the next 12 months, says Tom Potiowsky, state economist. “Permit data is still down, coming into this year” on residential housing, says Potiowsky. “The commercial side is just starting to show some signs of weakness.” Indicators such as vacancy rates for industrial lands and absorption rates are just starting to show signs of weakness, he says, noting that this lag is typical of commercial construction. “When you get a boom, it’s one of the last parts to join the boom. When there’s a soft market, that tends to last a bit longer on the commercial side when things start to recover.”

Dave Castricano, senior vice president at U. S. Bank’s Commercial Real Estate division, says that construction lending overall is slow to moderate, citing dramatic declines in single family housing and the condominium boom. “Commercial project lending has also slowed, but there are still lending opportunities in the Portland Metropolitan area,” he says. “Overall, I think we will keep pace with the country in commercial construction at a moderate level” over the next twelve months.

Bart Eberwein, vice president at Hoffman Construction, says that the construction industry is “the caboose on the train. Three, four, five years ago, bonds were passed, contractors were paid, and now we’re pretty busy. We’ve got a fairly good amount of projects going on right now, as do most of the contractors in the industrial, institutional, and commercial arenas.” Eberwein speculates that as the economy begins to firm up and consumer confidence begins to rise again, the construction industry will begin to feel more of a slowdown. “I don’t think it will be awful, but I think we’ll be saying, gee, we need some work,” he says. “Being the caboose on the train, the rest of the train will be feeling the sunlight while we’re being dragged through the tunnel.”

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Castricano says that single family and Condominium developers are primarily concerned with reducing current inventory right now, and that many commercial developers are taking a “wait and see attitude” about the economy this year. “It is very difficult to predict interest rates and timing of takeout financing with the long-term lending markets so soft and interest rates so volatile,” he says. “This is making many developers stay on the sidelines, keeping construction generally curtailed this year.”

Despite the soft economy and hesitant market, there are bright spots. Potiowsky notes that public projects will probably hold up fairly well over the next year as funds have already been allocated for many of those projects. Castricano says that multifamily housing is very strong right now, largely due to the soft single-family housing market and rising rental rates. He also notes that Core Class A office buildings and industrial office buildings are performing well, and says that U. S. Bank is still very active in the lending market right now and is especially focused on multi-family housing and office industrial. He takes a long-term perspective, saying, “the economy has slowed down, but it never dies.”

Sustainable development remains a bright spot in the construction industry as well. In the most recent economic review and forecast for the State of Oregon, Potiowsky notes that sustainable development remains a factor in the long-term growth of the state, potentially allowing gains for market share in construction and consulting firms in Oregon.

Eberwein agrees. “If there were a place here people might want to pinch pennies, it would probably be green building,” he says. “But that’s not what we’re seeing. Office buildings, hotels, college dorms are all building green with social responsibility in mind.”

Eberwein predicts that health care and colleges campuses, in particular, will continue to see growth in the coming year, partly because of the aging Baby Boomer population and the large generation now beginning to enter college. “I can’t think of a single college campus in the Northwest that isn’t building or planning a capital improvement project right now,” he says.

“I’ve lived through a few of these cycles,” says Eberwein, “and my hunch is that this will not be prolonged, and that it will be softened by the dynamics of the global marketplace.” He notes that companies such as Amazon, Nike, and Microsoft, all headquartered in the Northwest, are building right now, and that as large players in driving the economic engine, they and companies like them will help pull the construction “caboose” through a slowdown.